New bankruptcy legislation adds protections for retirement plans.

THE NEW BANKRUPTCY LAW protects
tax-qualified retirement plans—pensions, profit-sharing and
401(k) plans—from creditors in bankruptcy.

SEP AND SIMPLE IRAs ARE
excluded from bankruptcy estates under the new law,
even if they qualify as ERISA pension plans.

TRADITIONAL AND ROTH IRAs that are
created and funded by an individual are subject to an
aggregate bankruptcy exclusion of $1 million.

SEP AND SIMPLE IRAs , BEING
ERISA plans, but not enjoying ERISA
antialienation protections, may be subject to attack in a
state action, since any protecting state law may be
preempted by ERISA.

TRADITIONAL AND ROTH IRAs are not
ERISA pension plans. They are protected in nonbankruptcy
proceedings by any state laws specifically protecting IRAs
since such state laws are not preempted by ERISA.

MARK P. ALTIERI, CPA/PFS, JD,
LLM, is an associate professor of accounting at Kent State
University, Kent, Ohio, and special tax counsel to Wickens,
Herzer, Panza, Cook and Batista in Avon. His e-mail address is
maltieri@wickenslaw.com . RICHARD A. NAEGELE, JD, is an
attorney and shareholder at Wickens, Herzer, Panza, Cook and
Batista. His e-mail address is rnaegele@wickenslaw.com
.

ebtors have hit a fork in the road. The Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (effective October 17,
2005) clarifies the rights of debtors and expands the protections
their retirement assets have in federal bankruptcy proceedings. But
outside of federal bankruptcy things remain murky, and there still is
uncertainty about whether retirement funds are subject to state
attachment and garnishment proceedings. This article gives CPAs
guidance on what has changed and tips for protecting clients’ assets
under either scenario.

EXCLUSION IN BANKRUPTCY The new law protects retirement funds by excluding
them from federal bankruptcy estates. It applies to any fund or
account that is tax-exempt under

IRC section 457(b)—deferred compensation plans for
employees of tax-exempt and state and local government employers.

Amount of Money in IRAs

IRAs are the single largest component of the U.S.
retirement market, holding $3.5 trillion of assets at
year-end 2004 (out of a total of $12.9 trillion of
retirement plan assets). Investors hold most ($3.2
trillion) of their IRA assets in traditional IRAs, which
they fund with rollovers from employer-sponsored
retirement plans and/or contributions.

The extent of the bankruptcy exclusion for an IRC section 408 IRA
varies. IRAs created under an employer-sponsored IRC section 408 SEP
IRAs and SIMPLE IRAs, as well as pension, profit-sharing or 401(k)
funds transferred to a rollover IRA, enjoy an unlimited exclusion from
the federal bankruptcy estate. The U.S. Bankruptcy Code now also
excludes traditional IRAs and Roth IRAs. These IRAs, which workers
create and fund themselves, are subject to an aggregate $1 million
exclusion limitation (adjusted for inflation and subject to increase
if the bankruptcy judge determines that the “interests of justice so
require”). The annual contributions individuals make to traditional or
Roth IRAs ranged from $2,000 to $3,000 for pre-2005 years, and to
$4,000 in 2005, so there is little danger of debtors’ reaching the
million-dollar exclusion amount.

Under the new law, a rollover from a SEP or SIMPLE IRA into an IRA
appears to receive only $1 million of protection. Bankruptcy Code
section 522(n) allows a general unlimited exclusion for rolled-over
qualified retirement plan wealth but does not sanction IRC section
408(d)(3) rollovers. Clients with SEP or SIMPLE IRA assets under $1
million can roll over these assets and avoid the potential problems
with SEP and SIMPLE IRAs outside of bankruptcy discussed below.

General Debtor Protections for Retirement Assets
In and Out of Federal Bankruptcy

Federal bankruptcy

State law Attachment/garnishment

Qualified retirement plans
(pension, profit-sharing, section 401(k))

Generally complete

Generally complete

Rollover IRAs

Generally
complete

Generally complete

Traditional and Roth IRAs

$1
million

Generally complete

SEP and SIMPLE IRAs

Generally complete

Probably none

Note: Absolute statements of protection are
problematic, as noted in the body of the article. For
example, qualified plan assets and IRAs are subject to
attachment for qualified domestic relations orders and
federal tax liens both in and out of bankruptcy.
Additionally, owner-only plans may be attachable outside of
bankruptcy. State law protections vary from state to state.

Case law and Department of Labor regulations have held that a
qualified retirement plan that benefits only the business owner and
spouse was not an ERISA plan and did not qualify for ERISA
antialienation protections either inside or outside of bankruptcy. The
act now eliminates this concern for federal bankruptcy proceedings, as
such plans now do qualify.

Practical tip. Because of the unlimited
exclusion for qualified retirement plan assets transferred into a
rollover IRA, CPAs should always ensure that rolled-over retirement
wealth is segregated in a rollover IRA that is distinct from other
traditional or Roth IRAs that the debtor may own.

PROTECTIONS OUTSIDE OF FEDERAL BANKRUPTCY The new act does not address debtors’ retirement
funds that are involved in state law insolvency, attachment or
garnishment proceedings. In that case a compilation of ERISA, case law
and state law comprises the relevant authority. The major concerns are
regarding owner-only plans and IRAs. Retirement funds also can be
attached through qualified domestic relations orders and federal tax
liens in or outside of a bankruptcy.

SEP AND SIMPLE IRAs Employer-sponsored SEP and SIMPLE IRAs are treated
differently from individually created and funded traditional and Roth
IRAs. ERISA defines a “pension” plan under its jurisdiction as any
“plan, fund or program that is established or maintained by an
employer that provides retirement income to employees.” Typically
pension, profit-sharing and section 401(k) plans qualify. The Labor
Department and the Federal Court of Appeals for the Tenth Circuit (in
Garratt v. Walker) held that SEP and SIMPLE IRAs also are ERISA
pension plans because they are arranged by the employer, even though
the contributions are immediately allocated to the employee’s IRA.

Generally, ERISA pension plans receive extensive antialienation
protection from creditors. However, this protection does not extend to
an IRA, including a SEP or SIMPLE IRA, even if it qualifies as an
ERISA pension plan. ERISA also contains specific preemption provisions
that supersede and void state law protections specifically afforded to
retirement arrangements that are ERISA pension plans (ERISA section
514(a)).

Thus, the SEP and SIMPLE IRA are at an impasse outside of
bankruptcy. They are ERISA pension plans—but do not qualify for ERISA
antialienation protections. Moreover, any state law protections may be
preempted, and a creditor may be able to bring a successful state
action against these assets.

NON- SEP AND SIMPLE IRAs An individually established and funded traditional or
Roth IRA is not an ERISA pension plan, so state laws can apply to
protect them. Usually the owner’s state of residency determines
whether the IRA is protected. For example, Ohio law specifically
exempts both traditional and Roth IRAs from execution, garnishment,
attachment or sale to satisfy a judgment or order, with no cap. For a
list of state laws protecting IRAs, see “
State-By-State Analysis of Individual Retirement Accounts as Exempt
Property. ”

Practical tip. CPAs should advise their
clients that assets rolled over from a SEP or SIMPLE IRA into a
rollover IRA should, at that point, no longer be part of an
employer-maintained arrangement and therefore would lose their
characterization as parts of an ERISA pension plan. The rolled-over
assets would not then be subject to ERISA preemption and could take
advantage of state law protections for non-SEP and SIMPLE IRAs. If
there is less than $1 million of such rolled-over wealth, the
resulting rollover IRA would be afforded unlimited protections under
nonbankruptcy proceedings in states such as Ohio and protected in a
bankruptcy proceeding.

As an example, Mark Smith is a small business owner who has $500,000
invested in a SEP IRA established by his company. Under his state’s
law, assets held in an IRA generally are exempted from any creditor
claims. Mark is successfully sued for $300,000 of damages in state
court and is not filing for federal bankruptcy protection.

This matter is outside of federal bankruptcy law, and the new
bankruptcy protections therefore do not apply. Because Mark’s money is
in a SEP IRA, it constitutes an ERISA pension plan, preempting any
state law directly protecting it, and it would not qualify for the
antialienation protections usually afforded ERISA plans. The judgment
creditor therefore may successfully attach Mark’s IRA.

If Mark transferred the money in his SEP IRA to a rollover IRA, it
no longer would qualify as an ERISA pension plan. Thus it would be
protected from creditor claims up to $1 million either inside a
bankruptcy proceeding or possibly to an unlimited extent outside of
bankruptcy under applicable state law.

Note that in Rousey v. Jacoway, the Supreme Court
held that IRAs are a “similar plan or contract” to pension and
profit-sharing plans under the limited exemption in the Bankruptcy
Code. This decision, although largely irrelevant since the new law,
may be authoritative in states that protect pension and profit-sharing
plans without specifically protecting IRAs. In these states the fact
that the Supreme Court equated IRAs with traditional retirement plans
might be persuasive in a nonbankruptcy proceeding involving
traditional or Roth IRAs.

CPAs should note the change that has occurred since the advent of
the new bankruptcy law. Wealth residing in qualified retirement plans
(pension, profit-sharing and section 401(k) plans) continues to
possess the most extensive debtor protections both in and outside of a
bankruptcy proceeding. A distinct IRA into which qualified retirement
plan assets are rolled, an asset frequently attacked under pre-act
bankruptcy law, would constitute as strong a protected reservoir of
wealth under the new post-act unlimited exclusion for such IRAs in a
federal bankruptcy proceeding. Similarly, in states providing strong
IRA protection (such as Ohio), the rollover IRA would enjoy unlimited
protection from creditors in a nonbankruptcy proceeding.

OWNER-ONLY PLANS ERISA and the Internal Revenue Code’s broad
antialienation protections generally have protected a debtor’s pension
plan, profit-sharing or 401(k) plan benefits from creditor claims both
in and outside of bankruptcy. However, under case law and Department
of Labor regulations, a plan that benefits only an owner and his or
her spouse is not an ERISA plan, and so does not qualify for
antialienation protections under Title I of ERISA.

As noted above, owner-only plans are not at risk in bankruptcy
proceedings. Outside of bankruptcy, the owner-only category does not
apply if nonowner participants are added to the plan. So the easiest
way to protect funds in such plans is by adding other participants.
Alternatively, one could make the same argument, as was just examined
with regard to traditional and Roth IRAs outside of bankruptcy, that
since owner-only plans are not ERISA plans, state law protecting
retirement plans would not be preempted.

THE CURRENT STATE OF PROTECTIONS Qualified retirement plans and IRAs are protected
under the new bankruptcy legislation. Outside of bankruptcy, ERISA
provides nearly unlimited antialienation protection to qualified
retirement plans (pensions, profit-sharing and 401(k) plans). State
law generally protects traditional and Roth IRAs. SEP and SIMPLE IRAs
and owner-only plans, however, require additional planning to insulate
them from creditor claims.

State -By-State Analysis of Individual Retirement Accounts as Exempt
Property

STATE

STATE STATUTE

IRA EXEMPT

ROTH IRA
EXEMPT

SPECIAL STATUTORY
PROVISIONS

Alabama

Ala. Code Section 19-3-1(b)

Yes

No

Alaska

Alaska Stat. Section 09.38.017

Yes

Yes

The exemption does not apply to amounts
contributed within 120 days before the debtor files for
bankruptcy.

Arizona

Ariz. Rev. Stat. Ann. Section 33-1126(C)

Yes

Yes

The exemption does not apply to amounts
contributed within 120 days before a debtor files for
bankruptcy.

Arkansas

Ark. Code Ann. Section 16-66-220

Yes

Yes

A bankruptcy court held that
the creditor exemption for IRAs violates Arkansas Constitution
— at least with respect to contract claims.

California

Cal. Code of Civil
Procedure Section 704.115

No

No

IRA's are exempt only to the extent necessary to provide
for the support of the judgment debtor when the judgment
debtor retires and for the support of the spouse and
dependents of the judgment debtor, taking into account all
resources that are likely to be available for the support of
the judgment debtor when the judgment debtor retires.

Colorado

Colo. Rev.
Stat. Section 13-54-102

Yes

Yes

Any retirement benefit or payment is subject to attachment
or levy in satisfaction of a judgment taken for arrears in
child support; any pension or retirement benefit is also
subject to attachment or levy in satisfaction of a judgment
awarded for a felonious killing.

Connecticut

Conn. Gen. Stat.
Section 52-321a

Yes

Yes

Delaware

Del. Code
Ann. Tit. 10, Section 4915

Yes

Yes

An IRA is not exempt from a claim made pursuant to Title
13 of the Delaware Code, which Title pertains to domestic
relations order.

Florida

Fla. Stat. Ann. Section 222.21

Yes

Yes

Georgia

Ga. Code Ann. Section 44-13-100

No

No

IRA's are exempt only to the extent
necessary for the support of the debtor and any dependent.

Hawaii

Haw. Rev.
Stat. Section 651-124

Yes

No

The
exemption does not apply to contributions made to a plan or
arrangement within three years before the date a debtor files
for bankruptcy, whether voluntary or involuntary, or within
three years before the date a civil action is initiated
against the debtor.

Idaho

Idaho Code Section 55-1011

Yes

Yes

The exemption only applies for claims of
judgment creditors of the beneficiary or participant arising
out of a negligent or otherwise wrongful act or omission of
the beneficiary or participant resulting in money damages to
the judgment creditor.

Illinois

Ill. Rev. Stat. Ch. 735, Para. 5/12-1006

Yes

Yes

Indiana

Ind. Code Section
34-55-10-2

Yes

No

Indiana only
protects deductible contributions made to a retirement plan.

Iowa

Iowa Code
Section 627.6

Yes

Yes

Kansas

Kan. Stat.
Ann. Section 60-2308

Yes

Yes

Kentucky

Ky. Rev.
Stat. Ann. Section 427.150(2)(f)

Yes

Yes

The exemption does not apply to any amounts
contributed to an individual retirement account if the
contribution occurred within 120 days before the debtor filed
for bankruptcy. The exemption also does not apply to the right
or interest of a person in individual retirement account to
the extent that right or interest is subject to a court order
for payment of maintenance or child support.

Louisiana

La. Rev. Stat. Ann.
Sections. 20-33(1) and 13-3881(D)

Yes

Yes

No contribution to an IRA is exempt if made less than
one calendar year from the date of filing bankruptcy, whether
voluntary or involuntary, or the date rights of seizure are
filed against the account. The exemption also does not apply
to liabilities for alimony and child support.

Maine

Me. Rev. Stat. Ann.
Tit. 14, Section 4422(13) (E)

No

No

IRA's are exempt only to the extent reasonably necessary
for the support of the debtor and any dependent.

Maryland

Md. Code Ann. Cts.
& Jud. Proc. Section 11-504(h)

Yes

Yes

IRA's are exempt from any and all claims of creditors
of the beneficiary or participant other than claims by the
Department of Health and Mental Hygiene.

Massachusetts

Mass. Gen.
L.Ch. 235, Section 34A

Yes

Yes

The exemption does not apply to an order of court
concerning divorce, separate maintenance or child support, or
an order of court requiring an individual convicted of a crime
to satisfy a monetary penalty or to make restitution, or sums
deposited in a plan in excess of 7% of the total income of the
individual within 5 years of the individual's declaration of
bankruptcy or entry of judgment.

Michigan

Mich. Comp. Laws
600.6023

Yes

Yes

The exemption
does not apply to amounts contributed to an individual
retirement account or individual retirement annuity if the
contribution occurs within 120 days before the debtor files
for bankruptcy. The exemption also does not apply to an order
of the domestic relations court

Minnesota

Minn. Stat. Section
550.37

Yes

Yes

Exempt to a
present value of $30,000 and additional amounts reasonably
necessary to support the debtor, spouse or dependents.

Mississippi

Miss.
Code Ann. Section 85-3-1

Yes

No

Missouri

Mo. Rev. Stat. Section 513.430

Yes

Yes

If proceedings under Title 11 of United States Code
are commenced by or against the debtor, no amount of funds
shall be exempt in such proceedings under any plan or trust
which is fraudulent as defined in Section 456.630 of the
Missouri Code, and for the period such person participated
within 3 years prior to the commencement of such proceedings.

Montana

Mont. Code
Ann. Section 31-2-106(3)

Yes

No

The exemption excludes that portion of contributions made
by the individual within one year before the filing of the
petition of bankruptcy which exceeds 15% of the gross income
of the individual for that one-year period.

Nebraska

Neb. Rev. Stat.
Section 25-1563.01

Yes

Yes

The
exemption only applies to the extent reasonably necessary for
the support of the Debtor and any dependent of the Debtor.

Nevada

Nev. Rev.
Stat. Section 21.090(1)(q)

Yes

No

The exemption is limited to $500,000 in present value held
in an individual retirement account, which conforms with
Section 408.

New Hampshire

N.H. Tit. 52 Section 511:2

Yes

Yes

Exemption only applies to extensions of
credit and debts arising after January 1, 1999.

New Jersey

N.J. Stat. Ann.
25:2-1(b)

Yes

Yes

New Mexico

N.M. Stat. Ann.
Section 42-10-1

Yes

Yes

A
retirement fund of a person supporting another person is
exempt from receivers or trustees in bankruptcy or other
insolvency proceedings, fines, attachment, execution or
foreclosure by a judgement creditor.

New York

N.Y. Civ. Prac. L.
and R. Section 5205(c)

Yes

Yes

Additions to individual retirement accounts are not exempt
from judgments if contributions were made after a date that is
90 days before the interposition of the claim on which the
judgment was entered.

North
Carolina

N.C. Gen. Stat. Section
1C-1601(a)(9)

Yes

Yes

North Dakota

N.D.
Cent. Code Section 28-22-03.1(3)

Yes

Yes

The account must have been in effect for a period of
at least one year. Each individual account is exempt to a
limit of up to $100,000 per account, with an aggregate
limitation of $200,000 for all accounts. The dollar limit does
not apply to the extent the debtor can prove the property is
reasonably necessary for the support of the debtor, spouse, or
dependents.

Ohio

Ohio Rev. Code Ann. Section 2329.66(A)(10)

Yes

Yes

SEPs and SIMPLE IRAs are not exempt.

Oklahoma

Okla.
Stat. Tit. 31, Section 1(A)(20)

Yes

Yes

Oregon

OR. Rev. Stat. 23.170

Yes

Yes

Pennsylvania

42 PA. Cons. Stat. Section 8124

Yes

Yes

The exemption does not apply to amounts
contributed to the retirement fund within one year before the
debtor filed for bankruptcy.

Rhode
Island

R.I. Gen. Laws Section 9-26-4

Yes

Yes

The exemption does not
apply to an order of court pursuant to a judgment of divorce
or separate maintenance, or an order of court concerning child
support.

South Carolina

S.C. Code Ann. Section 15-41-30

No

No

The debtor's right to receive individual
retirement accounts and Roth accounts are exempt to the extent
reasonably necessary for the support of the debtor and any
dependent of the debtor.

The exemption does not apply to amounts contributed or
benefits accrued by or on behalf of a debtor within one year
before the debtor files for bankruptcy.

Vermont

Vt. Stat. Ann. Tit.
12 Section 2740(16)

Yes

Yes

Virginia

Va. Code
Ann. Section 34-34

Yes

Yes

The
exemption does not apply to the extent that the interest of
the individual in the retirement plan would provide an annual
benefit in excess of $17,500.00. If an individual has an
interest in more than one retirement plan, the limitation is
applied as if all retirement plans constituted a single plan.
The Code provides a table from which the annual benefit may be
determined.

Washington

Wash. Rev. Code Section 6.15.020

Yes

Yes

West Virginia

W.Va. Code
Section 38-10-4

Yes

No

Wisconsin

Wis.
Stat. Section 815.18(3)(j)

Yes

Yes

The exemption does not apply to an order of court
concerning child support, family support or maintenance, or
any judgments of annulment, divorce or legal separation.